ASIC consults on its proposal to effectively prohibit stub equity control transactions involving an Australian proprietary company or a public company with a custodian arrangement.
- Stub equity deals have been in use for a number of years in the Australian market.
- This has included using Australian proprietary companies as the stub equity vehicle, with a custodian structure to prevent the 50 non-employee shareholder limit for proprietary companies being crossed.
- ASIC raised concerns about the use of a proprietary company with a custodian structure in the Capilano Honey Limited scheme of arrangement in late 2018, and shortly afterwards indicated it would consult on measures to restrict offers to retail investors of stub equity in proprietary companies.1
- ASIC has released Consultation Paper 312 on its proposal to effectively prohibit stub equity deals involving an Australian proprietary company or an Australian public company with a custodian arrangement, in circumstances which, in ASIC’s view, deprive investors of the protections under the public company, takeovers or disclosing entity provisions of the Corporations Act.
‘Stub equity’ comprises securities in an unlisted vehicle that are offered under a scheme or takeover as consideration for the acquisition of securities of a listed entity (or unlisted entity to which the takeovers regime applies). Stub equity deals have provided added flexibility and optionality in public control transactions so that, for example, in addition to the option of being cashed out, target securityholders can elect to retain an economic exposure to the business being acquired.
ASIC’s concern is that the way in which stub equity can be currently offered (in compliance with the Corporations Act) means that certain rights available under the Corporations Act for retail investors of widely held Australian public companies are not available in particular types of stub equity structures.
ASIC’s proposed restrictions on stub equity deals
In view of ASIC concerns, ASIC has now proposed that:
- proprietary company restriction: the unlisted vehicle in which stub equity is offered must not be an Australian proprietary company; and
- custodian / trustee restriction (including for public companies): the stub equity securities (even in a public company) cannot be required to be issued to a custodian on behalf of investors where it would result in the stub equity vehicle not being subject to the disclosing entity, takeovers or public company provisions of the Corporations Act (where those provisions would have otherwise applied without the custodian arrangement).
Proprietary company restriction
The Corporations Act currently contains an exemption from the fundraising provisions (e.g. the requirement to prepare a prospectus) for securities issued under a takeover or scheme. ASIC proposes to effectively prohibit the use of a proprietary company as a stub equity vehicle by modifying this exemption through a legislative instrument to provide that it does not apply to an offer of securities in a proprietary company. In addition, ASIC proposes to prevent the use of a custodian structure (as described below) to keep the stub equity vehicle to under the 50 non-employee shareholder threshold for proprietary companies.
ASIC’s reasoning is that, even with extensive disclosure to investors regarding the stub equity, proprietary companies are not an appropriate vehicle for general public offerings to a large number of investors. Rather, in ASIC’s view, investors should have the benefit of the additional requirements applicable to Australian public companies. These include restrictions on related party transactions and conflicted directors voting, rules for the appointment and removal of directors, additional Australian residency requirements for directors, a requirement to hold annual general meetings and periodic financial reporting obligations.
Custodian / trustee restriction (even for public companies)
ASIC has also gone a step further from its original media release and proposes to effectively also restrict stub equity vehicles which may be Australian public companies with a custodian arrangement that limits the number of shareholders where its effect would be:
- that the threshold for the takeovers regime in the Corporations Act would not apply (because the entity is not a listed entity or an unlisted public company with more than 50 members); or
- that the entity does not become a disclosing entity, and is therefore not subject to continuous disclosure obligations under the Corporations Act, despite stub equity being taken up by 100 or more persons.
ASIC proposes to give effect to this through a modification to the takeover and scheme exceptions to the 20% rule in section 611 of the Corporations Act, by dis-applying the exceptions in the situations described above.
Consultation is open until 17 July 2019. We intend to provide a submission to ASIC outlining our views as to why we disagree with the proposal and will provide another update in due course.
- See also our earlier article on this topic: Surveying the stub equity landscape post-Capilano